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Bargaining over Entry with a Compulsory License Deadline: Price Spillovers and Surplus Expansion

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  • Eric W. Bond
  • Kamal Saggi

Abstract

We analyze bargaining between a developing country (South) and a multinational firm over the local price of its patented product. We use an alternating offers bargaining game in which the South can resort to compulsory licensing (CL) if the two parties fail to reach agreement by a certain deadline. The presence of international price spillovers introduces two novel features into the standard bargaining problem: the surplus from entry prior to the CL deadline may be negative, and CL can yield higher surplus than entry. We establish conditions under which equilibrium may exhibit immediate entry, preemptive entry just prior to the CL deadline, or the occurrence of CL. The South necessarily gains from the threat of CL if the joint payoff under entry is higher relative to CL but can lose if it is lower.

Suggested Citation

  • Eric W. Bond & Kamal Saggi, 2017. "Bargaining over Entry with a Compulsory License Deadline: Price Spillovers and Surplus Expansion," American Economic Journal: Microeconomics, American Economic Association, vol. 9(1), pages 31-62, February.
  • Handle: RePEc:aea:aejmic:v:9:y:2017:i:1:p:31-62
    Note: DOI: 10.1257/mic.20150031
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    References listed on IDEAS

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    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    2. Margaret K. Kyle, 2007. "Pharmaceutical Price Controls and Entry Strategies," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 88-99, February.
    3. Ho, Cynthia, 2011. "Access to Medicine in the Global Economy: International Agreements on Patents and Related Rights," OUP Catalogue, Oxford University Press, number 9780195390124.
    4. Roy, Santanu & Saggi, Kamal, 2012. "Equilibrium parallel import policies and international market structure," Journal of International Economics, Elsevier, vol. 87(2), pages 262-276.
    5. Pinelopi Koujianou Goldberg, 2010. "Alfred Marshall Lecture Intellectual Property Rights Protection in Developing Countries: The Case of Pharmaceuticals," Journal of the European Economic Association, MIT Press, vol. 8(2-3), pages 326-353, 04-05.
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    More about this item

    JEL classification:

    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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